The Great Fight Over Airline Distribution

What is American Airlines doing with its direct connect program? So far that program has cost the airline its spot in two major online travel agencies - American pulled its fares off Orbitz and Expedia dropped the airline’s fares – and yesterday GDS Sabre downgraded American in its displays and has threatened to drop the airline completely.

American is paying the price of being the self-appointed point man for an airline industry that no longer wants to pay booking fees to GDSs, which display airfares in an open marketplace, allowing consumers to comparison shop. Instead, American wants to market one-to-one to customers, offering specific products tailored to the individual customer - offering one thing to premium travelers and something else to the occasional traveler. Such one-to-one marketing is the norm today, but in this instance it threatens consumers’ ability to comparison shop for fares through the GDS, which has brought transparency to airline pricing for nearly 50 years, listing virtually all airlines, their fares and schedules.

For their part, airlines want consumers to shop for airline tickets in the same way they once shopped for a refrigerator - going from store to store to compare prices. It would be nice to look at a refrigerator at Sears and know what Loews and Home Depot charge for that same appliance without having to go from store to store, Ben Baldanza, CEO of Spirit Airlines, told Congress last July in a hearing about airline pricing transparency.

The problem with Baldanza’s metaphor is that it was true in 1970 but not today. Any consumer shopping for anything can go online, Google the product, get the pricing and the store with best price (online or brick-and-mortar) as well as a rating for the quality of the retailer and the product itself. The Internet brought pricing transparency to the broader marketplace 30 years after the GDSs, which were created by the very airlines who now battle them, brought it to airline consumers (American, for example, developed Sabre).

The relationship between airlines and the GDSs is now a bitter one. Over the past several years airlines have successfully cut the fees they have to pay GDSs and are trying to limit the information they display in them. Airlines want to sell in their own online stores where travelers can see only that airline’s prices and products or the fares of their alliance partners.

The airlines laid out much of their rationale in a manifesto called “Distribution 2.0: Innovating the Airline Indirect Channel,” published by the Open Axis Group (www.openaxisgroup.org), which is made up of major airlines and the Airline Tariff Publishing Company (ATPCO). In that document, they stress their commitment to pricing transparency, but their efforts to shift to the direct channel make comparison shopping tougher.

Airlines are clear about one thing, however - their desire to shift sales away from indirect channels, such as travel agents, an online travel agency (OTA) or travel management company (TMC). The travel agency distribution model, for example, once accounted for 80 percent of airline bookings, but is now down to roughly 50 percent. If American has its way, that percentage will dwindle still further, replaced by “direct connects” – which means consumers will go directly to American’s website or travel agencies, OTAs and TMCs will connect directly to American’s website rather than using the GDSs.

American says “direct connects” facilitate traveler-authenticated-marketing. American and other airlines want to take their menu of services and offer what they think fits the customer best based on what they know about that customer. If you’re a premium traveler, for example, you check your bags for free and get an upgrade. If you’re a not-so-frequent traveler, you pay to check your bag and the privilege of choosing a seat. Did you have a bumpy landing? Maybe the airline wants to offer you a free trip or a $25 credit.

That sort of customer database marketing is the norm these days, but the problem with the current airline version of this is that travelers don’t know the total price until they’re about to pay. A base fare of $160 turns out to really be $210 once you add in bags and seat selection - two very basic airline services. But you don’t find out about that until you’ve nearly completed your booking.

American, while saying it is all for pricing transparency and is willing to work with the GDSs, including Travelport, says that it does this kind of traveler-authenticated marketing best and the GDSs can’t do it. Not so, say the GDSs, which point out that they can provide all of this functionality as well. They say they are just waiting for the airlines to turn on the spigot so the information can flow into the GDSs. But no airline wants to be the first to do this, since it puts them in a position no airline executive wants to be in - a competitive disadvantage.

Some GDSs are getting the information they want on their own. Sabre, for example, did an end run around airlines by scouring airline websites for their ancillary services and fees and importing them into the system, making it possible to compare the total price of an airline ticket, not just the base fare.

Travelport, which owns 48 percent of Orbitz, the OTA that American is apparently using it as a pawn in its dispute with Travelport, says it can do everything that American says only it can do and is already doing so with a number of airlines.

What are the chances that American will succeed? The airline industry has often sown the seeds of its own problems, particularly when it comes to marketing and distribution. Look at its longtime marketing strategy based on bloody fare wars and expensive loyalty programs. Airlines embraced the Internet because it meant they didn’t have to pay base commissions to thousands of brick-and-mortar travel agents -and then they discovered the reality of dealing with the clout of online agency megaliths. And then, of course, airlines created the very GDSs they’ve been battling for the past few years.

Finally, given the fact that Gary Kelly, CEO of Southwest Airlines and vice-chairman of the Air Transport Association (ATA), has said that fuel costs - which account for more than 25 percent of airline operating expenses, the highest cost airlines bear, according to the ATA - are the greatest threat facing the industry today, it’s somewhat baffling to see airlines devote so much energy to managing distribution costs. Could it be that the airlines, and American in particular, are targeting the wrong cost for elimination? And in the process, they are exposing themselves to the wrath of their customers, both business and leisure, many of whom see the latest moves as against their interests.

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